Things are Looking Up in Ukraine, Really

There are positive signs despite the chaos. Investors should not pile into Ukrainian securities just yet, however.

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Ukraine's hastily thrown-together interim government certainly has its work cut out for it. Vladimir Putin has mobilized 150,000 Russian troops for "exercises" on the country's northern border. To the south, Crimean activists have chased out incumbent authorities and hoisted the Russian flag over the regional parliament. To the west, Ukrainian nationalist thugs have turned up at a few city halls to wave Kalashnikovs around and tell everybody who's boss. Protestors still linger in downtown Kiev demanding a vague agenda of post-Soviet Jacobinism.

The new authorities must cope with all these crises before settling down to address the nation's parlous finances and potential bankruptcy. No wonder Prime Minister Arseniy Yatsenyuk has labeled himself and his colleagues "kamikazes."

Yet the first week after President Viktor Yanukovych's astonishing flight from power has to be considered a success for Ukraine. The new government, while dominated by what was the opposition Batkyvshchina Party, managed to leave hotheads on the periphery while seasoned, moderate professionals took over the key posts. This was no easy trick as the interim ministers had to clear an ad hoc plebiscite on the Maidan, the Independence Square that was the epicenter of three months of protest, and crowds there were understandably in a mood to throw all the old rascals out.

Yatsenyuk & Co. finessed this issue by taking on a number of street activists in harmless roles such as minister of culture or sport. Yatsenyuk himself seems as respectable a figure as one could be after 15 years at the heart of Ukrainian politics. He has served his country under three administrations as economics minister, foreign minister and central bank chairman, emerging as the sort of technocratic realist that current conditions urgently demand.

The new finance minister, Oleksandr Shlapak, has also been in and out of office since 2000 or so, serving, among other things, as economics minister and deputy head of the national bank. Incoming central bank chief Stepan Kubiv is an economics Ph.D. who ran a respected commercial bank in the western city of Lviv for eight years, then risked his life as a "commandant" in the Maidan uprisings to boot. When the Western powers and the International Monetary Fund arrive shortly in Kiev to discuss financial rescue, they will at least find the local grown-ups at the table.

The situation in Crimea is hairy but manageable. The beautiful subtropical peninsula is geographically and economically isolated from the rest of Ukraine, with a stand-alone tourist industry fed mostly by visitors from Russia. (Crimea has been tragically bypassed by Turkey as middle-class Russians' beach destination of choice, but that's another story.)

The territory already has a loose autonomous status within Ukraine, and the Russian navy already occupies the Crimean port of Sevastopol. All this leaves plenty of room for a fudge whereby the Crimeans would run their own affairs without formally exiting Ukraine. Indeed, the renegades who have seized power there seem bent on this path. They have proposed a popular referendum asking: "Do you support Crimean self-determination within the framework of Ukraine on the basis of international treaties?"

More important is what is not happening in Ukraine politically -- any significant backlash in the Russian-speaking eastern industrial heartland around Yanukovych's home base of Donetsk. Things are quiet for a reason. The metals barons who control the region -- tough but pragmatic men like Rinat Akhmetov, the billionaire founder of Systems Capital Management -- want no part of Mother Russia. Reunification would mean bending the knee to Putin's ruling clique and defending their assets from even richer Moscow-based billionaires.

Yanukovych himself was a disappointment to these grandees, who nurtured and financed him for most of a decade, only to see him steal everything that wasn't nailed down for himself and his son once he gained power. The Donetsk elite, depending on export for their riches, could also benefit from closer ties to Europe, which Yanukovych and his Russian masters, of course, scuttled late last year.

Ukraine's financial condition, though hardly robust after two decades of multipartisan mismanagement, is not quite so dire as lately advertised. Prime Minister Yatsenyuk's estimate that the country needs $35 billion in external assistance looks like a fat bargaining chip placed on the table before the IMF and European Union get to town. In fact, the government has to pay out around $6.5 billion on sovereign bonds this year and scored $5 billion in low-interest refinancing from Russia before Yanukovych was toppled.

None of this means investors should pile into Ukrainian securities just yet, though yields north of 11% on sovereign paper make for an alluring speculation. A small miscalculation in Crimea could yet have the ugliest consequences, with Russian state media stoking the public day and night on visions of "fascism" resurgent across the border. Under the best circumstances, the interim government will work for three months, then cede the floor to a new round of conflict and confusion. Elections have been set for May, with no candidate who looks likely to unite the country's near-equal-strength opposing political camps.

Yet Ukraine has somehow muddled through its first 23 years of independence, and the further it muddles, the more incentive both sides have to maintain its independence and somehow balance its destiny (like its geography) between Russia and Europe. One may hope that the terrible cost of recent weeks in blood and treasure will nurture a consensus for compromise and hard work going forward. Despite the noise, Ukraine is moving tentatively in that direction.

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